Ergodicity, rational expectations, and the true meaning of history

15 May, 2011 at 14:48 | Posted in Statistics & Econometrics | Comments Off on Ergodicity, rational expectations, and the true meaning of history

Ergodicity is a difficult concept that many students of econom(etr)ics have problems with understanding. Trying to explain it, you often find yourself getting lost in mathematical-statistical subtleties difficult for most students to grasp.

In What is ergodicity? Vlad Tarko has made an admirably simplified and pedagogical exposition of what it means for probability structures of stationary processses and ensembles to be ergodic.

Then ask yourself: how can anyone take the rational expectations hypothesis seriously?

Is it not as Sir John Hicks had it already in Economic Perspectives (1977, vii): “One must assume that people in one’s models do not know what is going to happen, and know that they do not know what is going to happen. As in history”? And yet neoclassical economists still abstract from historical time and uncertainty, willfully ignoring that agents have different ways of approaching and coping with problems of non-routine decision-making and change in the absence of perfect knowledge, and that their heterogeneous expectations lead them to make different choices than the ergodic-rational-expectations models suggest.

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